MM Vitaoils Sdn Bhd - 2009

MARC has revised its outlook on MM Vitaoils Sdn Bhd’s (MMV) rating of its RM45.0 million Murabahah Commercial Paper Programme (MCP) to negative from stable.  Concurrently, MARC affirmed its MARC-2ID rating on the MCP.  The outlook revision reflects the slow build-up of liquidity ahead of significant sinking fund payments in 2011 as a result of its modest positive cashflow from operations.  The downstream edible oil producer could face a funding gap in the intermediate term if it is unable to access alternative sources of funding to the MCP by 2011.  MMV has limited financial flexibility, as reflected in its relatively small cash balances and no other sources of external finance apart from the MCP.

The affirmed rating reflects continued demand for MMV’s edible palm oil products, its diversified export markets and promising growth prospects.  The rating also acknowledges the company’s high financial leverage and recent pressures on profitability which were the result of the competitive environment in MMV’s key markets and susceptibility to increases in raw material prices.

MMV manufactures edible palm oil products, namely liquid cooking oil, margarine, shortening and vegetable ghee, mainly for the export markets.  Its key export markets comprise Central Asia, Europe and the Middle East, with approximately 98% of its revenue derived from export sales.  Domestic sales of cooking oil make up the remaining 2% of MMV’s revenue.  MMV recorded revenue of RM101.2 million in financial year ended December 31, 2008 (FY2008) up from RM87 million in FY2007.  Revenue growth for FY2008 was driven mainly by demand growth for vegetable ghee.  In FY2008, MMV’s revenue was derived from vegetable ghee, cooking oil and shortening, which contributed 23.0% (3.6% in FY2007), 31.3% (45.1% in FY2007) and 45.1% (47.4% in FY2007) respectively. 

Though revenue was on an increasing trend, operating margins narrowed by 1.7% to 7.6% in FY2008 year-on-year, mainly on account of higher raw material prices, namely of RBD palm olein which increased by 16% to RM3,850 per MT in 2008 from RM3,315 per MT in 2007.  Pre-tax profit declined as a result of higher raw material costs and the shift to lower margin products, namely vegetable ghee and shortening, to RM4.3 million from RM5.5 million in FY2007.  MMV’s gearing as measured by its debt-to-equity ratio, however, improved to 1.71 times (x) in FY2008 against the covenanted debt-to-equity ratio of 2.5x due to the increase in its equity base and unchanged debt level of RM45.0 million. 

MMV reported a fairly modest positive cashflow from operations (CFO) of RM1.3 million (FY2007: RM0.25 million) in FY2008.  As in FY2007, MMV’s financing costs continued to exceed its CFO in FY2008.  MMV’s free cash flow of RM1.3 million in FY2008 was its first positive free cash flow in the five-year period from FY2004 through FY2008.  While MMV needs to build up its sinking fund to RM30 million, or 45% of the outstanding MCP, ie RM20.25 million (whichever is the lower) by August 2011, its CFO has historically been and is prospectively expected to be insufficient to address the sinking fund requirements come 2011 even under favourable business conditions.  While refinancing at MMV does not pose a meaningful near-term risk, MARC believes that MMV’s ability to access alternative sources of external finance would have a significant bearing on the direction of its rating as August 2011 approaches.

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